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Chapter 26-1 Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette

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Text of Chapter 26-1 Prepared by Dan R. Ward Suzanne P. Ward University of Louisiana at Lafayette

Accounting Principles 8th EditionChapter 26-*
Chapter 26
Accounting Principles, Ninth Edition
Describe the concept of incremental analysis.
Identify the relevant costs in accepting an order at a special price.
Identify the relevant costs in a make-or-buy decision.
Give the decision rule for whether to sell or process materials.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Identify the factors to consider in retaining or replacing equipment.
Explain the relevant factors in whether to eliminate an unprofitable segment.
Determine which products to make and sell when resources are limited.
Contrast annual rate of return and cash payback in capital budgeting.
Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Preview of Chapter
An important purpose of management accounting is to provide managers with relevant information for decision making.
Considers uses of incremental analysis and capital budgeting in management’s decision making process
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Incremental Analysis
Capital Budgeting
Capital Budgeting
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods
Chapter 26-*
Steps usually involved in process include:
SO 1: Identify the steps in management’s decision-making process.
Illustration 26-1
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Considers both financial and non-financial information
Financial information includes revenues and costs as well as their effect on overall profitability
Non-financial information includes effect on employee turnover, the environment, or overall company image
SO 1: Identify the steps in management’s decision-making process.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Decisions involve a choice among alternative actions
Financial data relevant to a decision are the data that vary in the future among alternatives
Both costs and revenues may vary or
Only revenues may vary or
Only costs may vary
SO 2: Describe the concept of incremental analysis.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Incremental Analysis
Process used to identify the financial data that change under alternative courses of action
Identifies probable effects of decisions on future earnings
Also called differential analysis because it focuses on differences
SO 2: Describe the concept of incremental analysis.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Incremental revenue is $15,000 less under Alternative B
Incremental cost savings of $20,000 is realized
Alternative B produces $5,000 more net income
SO 2: Describe the concept of incremental analysis.
Illustration 26-2
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Fixed costs sometimes change between alternatives
Incremental analysis not the same as CVP analysis
SO 2: Describe the concept of incremental analysis.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
How Incremental Analysis Works
Incremental analysis is the process of identifying the financial data that
SO 2: Describe the concept of incremental analysis.
a. Do not change under alternative courses of action.
b. Change under alternative courses of action.
c. Are mixed under alternative courses of action.
d. None of the above.
Review Question
Chapter 26-*
SO 2: Describe the concept of incremental analysis.
BE26-2: Ming Company is considering two alternatives. Alternative A will have sales of $150,000 and costs of $100,000. Alternative B will have sales of $180,000 and costs of $120,000. Compare Alternative A to Alternative B showing incremental revenues, costs, and net income. Which alternative should you choose?
See notes page for solution
Chapter 26-*
SO 2: Describe the concept of incremental analysis.
BE26-2: Ming Company is considering two alternatives. Alternative A will have sales of $150,000 and costs of $100,000. Alternative B will have sales of $180,000 and costs of $120,000. Compare Alternative A to Alternative B showing incremental revenues, costs, and net income. Which alternative should you choose?
Chapter 26-*
Make or buy
Allocate limited resources
SO 2: Describe the concept of incremental analysis.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Accept an Order at a Special Price
Obtain additional business by making a major price concession to a specific customer
Assumes that sales of products in other markets are not affected by special order
Assumes that company is not operating at full capacity
SO 3: Identify the relevant costs in accepting an order at a special price.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example
Customer offers to buy a special order of 2,000 units at $11 per unit
No effect on normal sales
No effect on plant capacity; currently operating at 80% which is 100,000 units
Current variable manufacturing cost = $8 per unit
Current fixed manufacturing costs = $400,000 or $4 per unit
Normal selling price = $20 per unit
Based strictly on total cost of $12 per unit ($8 + $4), reject offer as cost exceeds selling price of $11
SO 3: Identify the relevant costs in accepting an order at a special price.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example - Continued
Fixed costs do not change since within existing capacity – thus fixed costs are not relevant
Variable manufacturing costs and expected revenues change – thus both are relevant to the decision
SO 3: Identify the relevant costs in accepting an order at a special price.
Decision: Accept the offer; Income increases by $6,000
Illustration 26-3
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Accept an Order at a Special Price
BE26-3: In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, prepare an incremental analysis that indicates the net income (loss) Karnes would realize by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a special price.
See notes page for solution
Chapter 26-*
Accept an Order at a Special Price
BE26-3: In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, prepare an incremental analysis that indicates the net income (loss) Karnes would realize by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a special price.
See notes page for solution
Chapter 26-*
SO 4: Identify the relevant costs in a make-or-buy decision.
Alternatively, the switches can be purchased for $8 per switch ($200,000)
Eliminates all variable costs of making switches
Eliminates $10,000 of fixed costs; however, $50,000 remain
Must decide whether to make the component parts or to buy them from others
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Total manufacturing cost is $1 higher than purchase price
Must absorb at least $50,000 of fixed costs under either option
SO 4: Identify the relevant costs in a make-or-buy decision.
Decision: Continue to make switches
as purchasing adds $25,000 to cost
Illustration 26-5
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Opportunity Cost
the potential benefit that may be obtained from following an alternative course of action
must be considered in incremental analysis
SO 4: Identify the relevant costs in a make-or-buy decision.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example – Continued
Assume that buying the switches allows the company to use the released capacity to earned $28,000 in additional income
The $28,000 lost income is an additional cost of making the switches – an opportunity cost
SO 4: Identify the relevant costs in a make-or-buy decision.
Decision: Buy the switches as company is $3,000 better off
Illustration 26-6
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
SO 4: Identify the relevant costs in a make-or-buy decision.
a. Manufacturing costs that will be saved.
b. The purchase price of the units.
c. Opportunity costs.
Review Question
Chapter 26-*
Make or Buy
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the part at $5.30 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Bartley will realize by buying the part. What should they do?
See notes page for solution
SO 4: Identify the relevant costs in a make-or-buy decision.
Chapter 26-*
Make or Buy
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the part at $5.30 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Bartley will realize by buying the part. What should they do?
See notes page for solution
SO 4: Identify the relevant costs in a make-or-buy decision.
Chapter 26-*
Accept an Order at a Special Price
BE26-3: In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, prepare an incremental analysis that indicates the net income (loss) Karnes would realize by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a special price.
See notes page for solution
Chapter
26-20
BE26-3:In Karnes Company it costs $30 per unit ($20 variable
and $10 fixed) to make a product that normally sells for $45. A
foreign wholesaler offers to buy 4,000 units at $23 each. Karnes
will incur special shipping costs of $1 per unit. Assuming that
Karnes has excess operating capacity, prepare an incremental
analysis that indicates the net income (loss) Karnes would reali ze
by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a sp
SO 3: Identify the relevant costs in accepting an order at a sp
ecial price.
ecial price.
Chapter 26-*
Chapter 26-*
Sell or Process Further
May have option to sell product at a given point in production or to process further and sell at a higher price
Decision Rule:
Process further as long as the incremental revenue from such processing exceeds the incremental processing costs
SO 5: Give the decision rule for whether to sell or process materials further.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Direct materials $ 15
Direct labor $ 10
Selling price of unfinished unit is $50
Used capacity used to finish tables to sell for $60 per table
Relevant unit costs of finishing table:
Direct materials increase $2
Direct labor increase $4
No change in fixed overhead
SO 5: Give the decision rule for whether to sell or process materials further.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Illustration 26-8
SO 5: Give the decision rule for whether to sell or process materials further.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Sell or Process Further
BE26-5: Stanton Inc. makes unfinished bookcases that it sells for $60. Production costs are $30 variable and $10 fixed. Because it has unused capacity, Stanton is considering finishing the bookcases and selling them for $72.Variable finishing costs are expected to be $8 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis showing whether Stanton should sell unfinished or finished bookcases.
See notes page for solution
SO 5: Give the decision rule for whether to sell or process materials further.
Chapter 26-*
Sell or Process Further
BE26-5: Stanton Inc. makes unfinished bookcases that it sells for $60. Production costs are $30 variable and $10 fixed. Because it has unused capacity, Stanton is considering finishing the bookcases and selling them for $72.Variable finishing costs are expected to be $8 per unit with no increase in fixed costs. Prepare an analysis on a per unit basis showing whether Stanton should sell unfinished or finished bookcases.
See notes page for solution
SO 5: Give the decision rule for whether to sell or process materials further.
Chapter 26-*
Make or Buy
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the part at $5.30 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Bartley will realize by buying the part. What should they do?
See notes page for solution
SO 4: Identify the relevant costs in a make-or-buy decision.
Chapter 26-*
Accept an Order at a Special Price
BE26-3: In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, prepare an incremental analysis that indicates the net income (loss) Karnes would realize by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a special price.
See notes page for solution
Chapter
26-20
BE26-3:In Karnes Company it costs $30 per unit ($20 variable
and $10 fixed) to make a product that normally sells for $45. A
foreign wholesaler offers to buy 4,000 units at $23 each. Karnes
will incur special shipping costs of $1 per unit. Assuming that
Karnes has excess operating capacity, prepare an incremental
analysis that indicates the net income (loss) Karnes would reali ze
by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a sp
SO 3: Identify the relevant costs in accepting an order at a sp
ecial price.
ecial price.
Chapter
26-26
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5
variable and $3 fixed) in making a sub -assembly part for its
finished product. A supplier offers to make 10,000 of the part
at $5.30 per unit. If the offer is accepted, Bartley will save all
variable costs but no fixed costs. Prepare an analysis showing
the total cost saving, if any, Bartley will realize by buying th e
part. What should they do?
See notes page for solution
See notes page for solution
SO 4: Identify the relevant costs in a make
SO 4: Identify the relevant costs in a make
-
-
Old Machine New Machine
Salvage value -0- -0-
Variable manufacturing costs decrease from $160,000 to $125,000 if new machine purchased
SO 6: Identify the factors to consider in retaining or replacing equipment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Decision: Replace the Equipment
The lower variable costs due to replacement more than offset the cost of the new equipment
Illustration 26-9
SO 6: Identify the factors to consider in retaining or replacing equipment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Additional Considerations
The book value of old machine does not affect the decision.
Book value is a sunk cost.
Costs which cannot be changed by future decisions (sunk cost) are not relevant in incremental analysis.
However, any trade-in allowance or cash disposal value of the existing asset is relevant.
SO 6: Identify the factors to consider in retaining or replacing equipment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
The decision rule in a sell-or-process-further decision is:
Process further as long as the incremental revenue from processing exceeds:
SO 5: Give the decision rule for whether to sell or process materials further.
a. Incremental processing costs.
b. Variable processing costs.
c. Fixed processing costs.
Review Question
SO 6: Identify the factors to consider in retaining or replacing equipment.
Chapter 26-*
Consider effect on related product lines
Fixed costs allocated to the unprofitable segment must be absorbed by the other segments
Net income may decrease when an unprofitable segment is eliminated
Decision Rule:
Retain the segment unless fixed costs eliminated exceed contribution margin lost
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Profitable lines: Pro and Master
Unprofitable line: Champ
Illustration 26-10
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
2/3 to Pro and 1/3 to Master
Revised Income Statement data:
Illustration 26-11
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example – Continued
Incremental analysis of Champ provided the same results: Do Not Eliminate Champ
Decrease in net income is due to Champ’s contribution margin ($10,000) that will not be realized if the segment is discontinued.
Illustration 26-12
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
If an unprofitable segment is eliminated:
a. Net income will always increase.
b. Variable expenses of the eliminated segment will have to be absorbed by other segments.
c. Fixed expenses allocated to the eliminated segment will have to be absorbed by other segments.
d. Net income will always decrease.
Review Question
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
Chapter 26-*
Eliminate an Unprofitable Segment
BE26-7: Derby, Inc. manufactures golf clubs in three models. For the year, the Eagle line has a net loss of $20,000 from sales $200,000, variable expenses $180,000, and fixed expenses $40,000. If the Eagle line is eliminated, $34,000 of fixed costs will remain. Prepare an analysis showing whether the Eagle line should be eliminated.
See notes page for solution
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
Chapter 26-*
Eliminate an Unprofitable Segment
BE26-7: Derby, Inc. manufactures golf clubs in three models. For the year, the Eagle line has a net loss of $20,000 from sales $200,000, variable expenses $180,000, and fixed expenses $40,000. If the Eagle line is eliminated, $34,000 of fixed costs will remain. Prepare an analysis showing whether the Eagle line should be eliminated.
See notes page for solution
SO 7: Explain the relevant factors in whether to eliminate an unprofitable segment.
Chapter 26-*
Make or Buy
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the part at $5.30 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Bartley will realize by buying the part. What should they do?
See notes page for solution
SO 4: Identify the relevant costs in a make-or-buy decision.
Chapter 26-*
Accept an Order at a Special Price
BE26-3: In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, prepare an incremental analysis that indicates the net income (loss) Karnes would realize by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a special price.
See notes page for solution
Chapter
26-20
BE26-3:In Karnes Company it costs $30 per unit ($20 variable
and $10 fixed) to make a product that normally sells for $45. A
foreign wholesaler offers to buy 4,000 units at $23 each. Karnes
will incur special shipping costs of $1 per unit. Assuming that
Karnes has excess operating capacity, prepare an incremental
analysis that indicates the net income (loss) Karnes would reali ze
by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a sp
SO 3: Identify the relevant costs in accepting an order at a sp
ecial price.
ecial price.
Chapter
26-26
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5
variable and $3 fixed) in making a sub -assembly part for its
finished product. A supplier offers to make 10,000 of the part
at $5.30 per unit. If the offer is accepted, Bartley will save all
variable costs but no fixed costs. Prepare an analysis showing
the total cost saving, if any, Bartley will realize by buying th e
part. What should they do?
See notes page for solution
See notes page for solution
SO 4: Identify the relevant costs in a make
SO 4: Identify the relevant costs in a make
-
-
Floor space for a retail firm
Raw materials, direct labor hours, or machine capacity for a manufacturing firm
Management must decide which products to make and sell to maximize net income
SO 8: Determine which products to make and sell when resources are limited.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
pencil sets
Limiting resource:
Deluxe set has higher contribution margin: $8
Standard set takes fewer machine hours per unit
SO 8: Determine which products to make and sell when resources are limited.
Illustration 26-13
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Must compute contribution margin per unit of limited resource
Standard sets have higher contribution margin per unit of limited resources
SO 8: Determine which products to make and sell when resources are limited.
Decision: Shift sales mix to standard sets or increase machine capacity
Illustration 26-14
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Alternative: Increase machine capacity from 3,600 to 4,200 machine hours
To maximize net income, all the additional 600 hours should be used to produce standard sets
SO 8: Determine which products to make and sell when resources are limited.
Illustration 26-15
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Capital Budgeting
The process of making capital expenditure decisions in business is known as
Capital Budgeting
The amount of possible capital expenditures usually exceeds the funds available for such expenditures
Capital budgeting involves choosing among various capital projects to find the one(s) that will
Maximize a company’s return on investment
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Evaluation Process
Many companies follow a carefully prescribed process in capital budgeting.
At least once a year:
Proposals are requested from each department
The capital budgeting committee screens the proposals and submits its findings to the officers of the company
Officers select projects and submit list to the board of directors for approval
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Evaluation Process
Providing management with relevant data for capital budgeting decisions requires familiarity with quantitative techniques.
The most common techniques are:
Annual Rate of Return
Discounted Cash Flow
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Evaluation Process
These techniques will be illustrated using the following data for Tappan Company:
Investment in new equipment: $130,000
Useful life of new equipment: 10 years
Zero salvage and straight-line depreciation
The expected annual revenues and costs of the new product that will be produced from the investment are:
Illustration 26-16
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Annual Rate of Return
The annual rate of return technique is based directly on accounting data
It indicates the profitability of a capital expenditure
The formula is:
The expected annual net income is from the projected Income Statement
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
Illustration 26-17
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
For Tappan Company the average investment is:
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
[($130,00 + $0) ÷ 2] = $65,000
Illustration 26-18
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Annual Rate of Return
The expected rate of return for Tappan Company’s investment in new equipment is:
The decision rule is:
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
A project is acceptable if its rate of return is greater than management’s minimum rate of return. When choosing among several acceptable projects, the project with the higher rate of return is generally more attractive.
$13,000 ÷ $65,000 = 20%
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Simplicity of calculations
Management’s familiarity with accounting terms used in the calculation
Major limitation of the technique:
It does not consider the time value of money
As noted in Appendix C, recognition of the time value of money can make a significant difference between the present and future values of an investment.
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Cash Payback
Identifies the time period required to recover the cost of the investment
Uses the net annual cash flow produced from the investment
Net annual cash flow can be approximated by taking net income and adding back depreciation
The formula for computing the cash payback period is:
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
Illustration 26-19
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Cash Payback
Example:
Tappan Company has net annual cash inflows of $26,000 ( Net Income $13,000 + Depreciation $13,000)
The cash payback period is:
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
$130,000 ÷ $26,000 = 5 years
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Cash Payback
Chen Company has uneven net annual cash inflows
Now the cash payback period is determined when the cumulative net cash flows equal the cost of the investment
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
Illustration 26-21
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Annual Rate of Return
Which of the following is incorrect about the annual rate of return technique:
SO 9: Contrast annual rate of return and cash payback in capital budgeting.
a. The calculation is simple.
b. The accounting terms used are familiar to management.
c. The timing of the cash inflows is not considered.
d. The time value of money is considered.
Review Question
Chapter 26-*
Cash Payback
BE26-9: Adler Company is considering purchasing new equipment for $300,000. It is expected that the equipment will produce annual net income of $10,000 over its 10-year useful life. Annual depreciation will be $30,000.
Compute the cash payback period.
Chapter 26-*
Cash Payback
Net income + depreciation
$10,000 + $30,000 = $40,000
$300,000 ÷ $50,000 = 6 years
Discounted Cash Flow
Discounted cash flow techniques generally recognized as best approach to making capital budgeting decisions
Techniques consider both:
Estimated total cash inflows, and
The time value of money
Two methods generally used with the discounted cash flow techniques are
Net Present Value Method
Internal Rate of Return Method
SO 10: Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Net Present Value Method
NPV method compares the present value of the cash inflows to the capital outlay required by the investment
The difference between the two amounts is referred to as the net present value
The interest rate used to discount the cash flow is the required minimum rate of return
A proposal is acceptable when the NPV is zero or positive
The higher the positive NPV, the more attractive the investment
SO 10: Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Net Present Value Decision Criteria
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-22
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example: Equal Annual Cash Flows
Annual cash flows of $26,000 uniform over asset’s useful life
Calculation of present value of annual cash flows (annuity) at 2 different discount rates:
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-23
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Analysis of proposal using net present values
NPV positive for both discount rates
Accept proposed capital expenditure at either discount rate
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-24
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example: Unequal Annual Cash Flows
Different cash flows each year over asset’s useful life; calculation of PV of annual cash flows at 2 different discount rates:
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-25
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Analysis of proposal using net present values
NPV positive for both discount rates
Accept proposed capital expenditure at either discount rate
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-26
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
IRR method finds the interest yield of the potential investment
IRR – rate that will cause the PV of the proposed capital expenditure to equal the PV of the expected annual cash inflows
Two steps in method
Compute the interval rate of return factor
Use the factor and the PV of an annuity of 1 table to find the IRR.
SO 10: Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example:
IRR factor for Tappan Company, assuming equal annual cash inflows:
$130,000 ÷ $26,000 = 5.0
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-27
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Example - Continued
Step 2: IRR is the discount factor closest to the IRR factor for the time period covered by the annual cash flows.
Closest discount factor to 5.0 is 5.01877; thus IRR is approximately 15%
SO 10: Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Compare IRR to management’s required minimum rate of return
Decision Rule:
Accept the project when the IRR is equal to or greater than the required rate of return.
Assuming a minimum rate of return for Tappan of 10%, project is accepted since IRR of 15% is greater than the required rate.
SO 10: Distinguish between the net present value and internal rate of return methods.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Internal Rate of Return Method
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-28
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
Comparison of Discounted Cash Flow Methods
SO 10: Distinguish between the net present value and internal rate of return methods.
Illustration 26-29
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)
Chapter 26-*
A positive net present value means that the:
SO 10: Distinguish between the net present value and internal rate of return methods.
a. Project’s rate of return is less than the cutoff rate.
b. Project’s rate of return exceeds the required rate of return.
c. Project’s rate of return equals the required rate of return.
d. Project is unacceptable.
Copyright
Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter
26-20
BE26-3:In Karnes Company it costs $30 per unit ($20 variable
and $10 fixed) to make a product that normally sells for $45. A
foreign wholesaler offers to buy 4,000 units at $23 each. Karnes
will incur special shipping costs of $1 per unit. Assuming that
Karnes has excess operating capacity, prepare an incremental
analysis that indicates the net income (loss) Karnes would reali ze
by accepting the special order. Should the order be accepted?
SO 3: Identify the relevant costs in accepting an order at a sp
SO 3: Identify the relevant costs in accepting an order at a sp
ecial price.
ecial price.
Chapter
26-15
BE26-2:Ming Company is considering two alternatives.
Alternative A will have sales of $150,000 and costs of
$100,000. Alternative B will have sales of $180,000 and
costs of $120,000. Compare Alternative A to Alternative B
showing incremental revenues, costs, and net income. Which
alternative should you choose?
BE26-4: Bartley Manufacturing incurs unit costs of $8 ($5
variable and $3 fixed) in making a sub -assembly part for its
finished product. A supplier offers to make 10,000 of the part
at $5.30 per unit. If the offer is accepted, Bartley will save all
variable costs but no fixed costs. Prepare an analysis showing
the total cost saving, if any, Bartley will realize by buying th e
part. What should they do?
See notes page for solution
See notes page for solution
SO 4: Identify the relevant costs in a make
SO 4: Identify the relevant costs in a make
-
-
for $60. Production costs are $30 variable and $10 fixed.
Because it has unused capacity, Stanton is considering finishing
the bookcases and selling them for $72.Variable finishing costs
are expected to be $8 per unit with no increase in fixed costs.
Prepare an analysis on a per unit basis showing whether Stanton
should sell unfinished or finished bookcases.
See notes page for solution
See notes page for solution
SO 5: Give the decision rule for whether to sell or process mat
SO 5: Give the decision rule for whether to sell or process mat
erials further.
erials further.
BE26-7: Derby, Inc. manufactures golf clubs in three models.
For the year, the Eagle line has a net loss of $20,000 from sale s
$200,000, variable expenses $180,000, and fixed expenses
$40,000. If the Eagle line is eliminated, $34,000 of fixed cost s
will remain. Prepare an analysis showing whether the Eagle line
should be eliminated.
SO 7: Explain the relevant factors in whether
SO 7: Explain the relevant factors in whether
to eliminate an unprofitable segment.
to eliminate an unprofitable segment.